The Nifty is seeing a short-term correction. There is reasonable support between 5,200 and 5,250. The intermediate trend turned positive about five weeks ago. So, there is time for it to register gains for another five-six weeks.
Ideally, the trend should rebound from current levels to test resistance above 5,350. An absolute confirmation of the long-term trend would come only as and when the resistance at 5,400 (the 2010-high) is beaten.
Carryover has been good. Open interest (OI) is increasing with stable volumes in both cash and derivatives. But the institutional attitude has been negative in the past couple of sessions. If that continues, it could cause an intermediate trend reversal. If the Nifty does drop below 5,200, it is likely to slide till 5,100, and there would be a chance of a deeper correction.
Of the traded index futures, the CNXIT seems to possess defensive strength and it has lost less ground than the Nifty. The BankNifty has been hit harder than the Nifty itself due to fears that high inflation will lead to another round of interest rate hikes. This has been a drag on the overall market. The next short-term uptrend is likely to be triggered by a bounce in the BankNifty, whenever that comes.
In the perspective of the next five sessions, derivative traders should be focused on moves between 5,200 and 5,400 with the possibility of a 100-125 point movement (to 5,075 or 5,525) if either of those limits is exceeded. Intra-day volatility has not been very high, but it could rise since the Vix has gone North.
The Nifty put-call ratio for July is around 1.4 in terms of OI. That's in the bullish zone. Near-the-money puts and calls are both priced high. It is a calculated risk to take bullspreads further from money. The expiry risk is low with settlement on July 29. Bearspreads close to money have good risk:reward ratios.
A long July 5,300c (premium 94) versus a short 5,400c (50) costs 44 and pays a maximum of 56, which is no better than acceptable. A long 5,400c and short 5,500c (22) costs 28 and pays a maximum of 72. A bearspread of long 5,200p (91) and short 5,100p (62) costs 29 and pays a maximum of 71.
The call-to-money bearspread is quite attractive in terms of pricing. But if you are bullish, consider moving further from money with long 5,400c-short 5,500c. Alternatively, take a long Nifty future, with a stop-loss at 5,200. A third possibility is a butterfly with one long 5,300c, two short 5,400c and a long 5,500c. This costs 16 (neglecting brokerage), which is the maximum loss. The butterfly could give a maximum return of about 84, if the market did move till 5,400.
